Defence Manufacturing

SUMMARY

• India has the third-largest armed forces in the world.
• The allocation of Defence in India's union budget is approx USD 34.53 billion and 31.1% of the defence budget is spent on capital acquisitions.
• 60% of defence-related requirements are met by imports which offers a huge opportunity for import substitution.
• The allocation for Defence in the Union Budget is approximate USD 34.53 billion.

REASONS TO INVEST

1. India’s current requirements on defence are catered largely by imports. The opening of the defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets as well as aim at global markets. Besides helping in building domestic capabilities, this will also bolster exports in the long term.
2. Contractual offset obligations worth approximately USD 4.53 billion in the next 5-6 years
3. The offset policy (which stipulates the mandatory offset requirement of a minimum 30% for procurement of defence equipment in excess of USD 306.69 million) introduced in the capital purchase agreements with foreign defence players. It would also ensure that an eco-system of suppliers is built domestically.
4. Favourable government policy which promotes self-reliance, indigenisation, technology up-gradation and achieving economies of scale including the development of capabilities for exports in the defence sector.
5. The country’s extensive modernisation plans with an increased focus on homeland security and India’s growing attractiveness as a defence sourcing hub.

GROWTH DRIVERS

Defence Production Policy, 2011 has encouraged indigenous manufacturing of defence equipment. Defence Procurement Procedure (DPP) has been amended in 2016 to provide for the following:

1. A new category of capital procurement - Buy Indian —IDDM (Indigenously Designed, Developed and Manufactured) introduced to encourage indigenous design, development and manufacturing of defence equipment.
2. Preference to ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ over ‘Buy (Global)’ categories of capital acquisition.
3. A clear and unambiguous definition of indigenous content.
4. Provision for Maintenance TOT (Transfer of Technology) to Indian Industry partners.
5. Provisions to allow foreign OEM (Original Equipment Manufacturer) to select Indian Production agency.
6. The requirement of minimum indigenous content has been enhanced/rationalised.
7. ‘Services’ as an avenue for discharging offsets have been re-introduced.
   • Defence products list for industrial licensing has been articulated in June 2014, wherein large numbers of parts/components, castings/ forgings etc. have been excluded from the purview of industrial licensing.
   • The defence security manual for the private sector defence manufacturing units has been finalised and put in the public domain by the Department of Defence Production. The manual clarifies the security architecture required to be put in place by the industry while undertaking sensitive defence equipment.
   • The MAKE procedure, which aims to promote research & development in the industry with support from the government and the placement of orders, has been promulgated with provision for 90% funding by Government and preference to MSMEs in a certain category of projects.

FDI POLICY

• 100% FDI in the defence sector: Up to 49% under automatic route; FDI above 49%, through Government route where it is likely to result in access to modern technology.
• The defence industry is subject to industrial licenses under the Industries (Development and Regulation) Act, 1951 and manufacturing of small arms ammunition under Arms Act, 1959
• The requirement of the single largest Indian ownership of 51% of equity removed.
• A lock-in period of three years on equity transfer has been done away with in FDI for defence.
• FDI in the defence sector is subject to other security conditions.

SECTOR POLICY

1. PROCUREMENT POLICY:
   • The defence procurement is governed by the Defence Procurement Procedure (DPP 2016).
   • The latest revision of DPP was released in 2019.

2. OFFSET POLICY:
   • The key objectives of the defence offset policy is to leverage capital acquisitions to develop the domestic defence industry. Mandatory offset requirements of a minimum of 30% for procurement of defence equipment in excess of USD 307.69 million have been envisaged.

3. PROCEDURES FOR THE GRANT OF INDUSTRIAL LICENSES HAVE BEEN STREAMLINED:
   • The initial validity period of industrial licenses has been increased from 3 years to 15 years with a provision to grant the extension for a period of 3 years.
   • Guidelines for the extension of validity of industrial licenses have been issued.
   • Partial commencement of production is treated as the commencement of production of all the items included in the license.

FINANCIAL SUPPORT

KEY PROVISIONS OF UNION BUDGET

• Development of two defence industrial production corridors.
• Announcement of an industry-friendly Defence Production Policy 2018 to promote domestic production by the public sector, private sector and MSMEs.

INVESTMENT OPPORTUNITIES

• Defence products manufacturing.
• Supply chain sourcing opportunity.

KEY ACHIEVEMENTS

• Indigenous defence products unveiled - Akash Surface to Air Missile System, Dhanush Artillery Gun system and Light Combat Aircraft
• The Defence Procurement Procedure (DPP) - 2013 amended to introduce Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured)
• The policy on Strategic Partnerships to encourage the participation of the private sector, in the manufacture of defence platforms and equipment such as aircraft, submarines, helicopters and armoured vehicles.
• ‘No Objection Certificate (NOC) for export: A web-based single-window interface created to issue 'No Objection Certificate'. The process is transparent and time-bound, with the maximum processing time reduced to 25 days and 70% of the NOCs issued in 15 days.